Freight Forwards Curve Warns Of Baltic Dry Index Collapse

The Baltic Dry Index (BDI) has hit the highest point all year, staging a stunning rebound that is earning dry bulk shipping companies substantial amounts of profit for the time being. The latest BDI rally has been particularly spectacular given the massive amount of new vessel supply, which generally sinks rates all else equal, it has overcome.

The sudden spike in new vessel supply this year is well by this chart from Johannes Moller at Danske Bank. Note the BDI rallied against this upward slope. This has been due to remarkably strong demand from China, plus some contribution from the grains trade which is seasonally strong right now.

Yet while dry bulk stocks have rallied to some extent, they haven't experienced the same strength as they have in the past when the BDI was at such high levels.

For example, DryShips (DRYS), Eagle Bulk Shipping (EGLE), and Genco Shipping (GNK) are trading below their highs for this year, and dramatically lower to where they've been in the past when the BDI was above 4,600. The same is generally the case for dry bulk shipping companies in Asia. So what gives?

While forecasting the BDI is a bit of fool's game, the stocks haven't run like in the past due to concerns that we may be set up for a massive BDI head-fake in 2010. This is because that supply chart you see above isn't set to get any better. It is set to worsen.

Danske Bank: We believe this [supply] trend should continue into 2010 when we believe quarterly deliveries are likely to be in the range of 15-20 m dwt, which is equal to an annualised fleet growth in the range of 13-18%.

The dry bulk freight forwards curve confirms this. It is forecasting a decline in rates, especially around the second quarter of 2010: